Serial Disrupter

Disrupting financial services has become something of a habit for entrepreneur Chris Larsen, a scheduled speaker at Sibos, an annual conference that gathers more than 8,000 banks from around the world.

Connecting people who need capital with loans? Larsen’s first two start-ups e-LOAN and peer-to-peer lending platform Prosper offer consumers easier, cheaper alternatives. E-LOAN, which was founded in 1997 then listed on the stock market before being bought in 2005 by Banco Popular, a bank with operations in Puerto Rico and the U.S, was the first company to give U.S. consumers free access to their credit scores. Prosper, founded in 2005, has facilitated more than $500 million in loans between private individuals. Lenders get a higher interest rate than they would by investing in a savings account and borrowers pay less interest than they would to a bank for a personal loan. While still relatively small compared with the overall loan market, peer-to-peer lending (see the story on pages 6 and 7) is growing quickly and is eating into banks’ fee-generation businesses.

Now Larsen is out to disrupt the industry again. OpenCoin, a start-up created with co-founder Jed McCaleb, has developed a new infrastructure for banks, individuals and companies to send money. International money transfer is one application, but OpenCoin also aims to offer a cheaper, more efficient way of handling merchant payments, direct consumer payments, wire transfers, and remittances.

While financial services have evolved with the Internet, the process used for sending money has remained largely unchanged. For example, a transfer of €50 from a bank in France to a dollar account at a bank in the United States can take several days or more to clear and will likely rack up hefty fees on both sides as it passes through several intermediaries.

In a bid to alter that scenario and modernize other banking functions, OpenCoin built Ripple, a network that allows for free instant transfers in any currency to any other currency.

“Finance is such a big part of people’s lives, but it has not seen the same changes as other sectors and I think there is still some good stuff we can do there,” says Larsen. “Financial services are ripe for innovation and solutions that improve efficiency.”

OpenCoin goes further than just offering a cheaper way to transfer money: it also is proposing an alternative electronic currency called the ripple. Ripple, along with Bitcoin and Ven, is shaping the future of money and widening the way the world determines and trades value. Ripples can already be used by consumers to pay for goods at thousands of merchants around the world. They can be used anywhere that Bitcoins are accepted but ripples are more versatile as any currency can be used on the Ripple network.

Money can also be directly transferred between consumers that have Ripple electronic wallets.

To withdraw ripples users must turn to what is called a gateway, a company that charges a fee to move the dollars, euros, yen or other currencies from a Ripple account to a traditional bank account. SnapSwap, one such gateway, charges a set-up fee, a yearly fee and then a 1% transaction fee.

“Banks are the best gateways and we are working hard to attract them,” says Larsen.

Like a growing number of start-ups OpenCoin wants to partner with banks. “You absolutely still need the banks,” says Larsen. “They are going to take a conservative view, but they’re intrigued by Ripple because it could help their business. I think it will be a process; they have to get comfortable with the technology.”

When Informilo went to press Ripple was still in beta though Larsen says the end of the beta period is imminent and that it will likely coincide with the payment system becoming open source. At that point anybody will be able to access the code and create a gateway, which will likely lead to a drop in the gateway fees.

OpenCoin has received an undisclosed amount of angel funding since April from an impressive list of first rate investors including Andreessen Horowitz, FF Angel IV, Lightspeed Venture Partners, Vast Ventures, Bitcoin Opportunity Fund, Google Ventures and China-based IDG Capital Partners.

But “Ripple needs to create trust with multiple partners to succeed,” says Yann Ranchere, finance director at Anthemis Group, an investment and advisory company focused on reinventing financial services for the 21st century. “Impact can go from very high, i.e., replacing some of the current payment protocols and bank infrastructure, to very limited because not enough partners will contribute.”

At the launch of the Ripple payment system, OpenCoin established that 100 billion ripples would be created. While that number will not change, the value of the ripple fluctuates against all other currencies. The value of a ripple can be volatile and during the month of August a U.S. dollar bought at various moments between 149 and 380 ripples.

Three-quarters of the ripples created are being distributed through giveaways and other methods to promote the service. OpenCoin, for example, is giving people 1,500 ripples when they verify their bank account with SnapSwap.

OpenCoin kept 25 billion ripples, a quarter of the total created, for itself. So far about three billion ripples have been distributed, with OpenCoin selling about $1.5 million worth to cover its operating costs including salaries for its 15 employees. A majority of all ripples (abbreviated as XRP, like USD) will be distributed to users.

OpenCoin argues that banks, money transfer services, credit cards companies and others will benefit from using Ripple. “Ripple follows in the footsteps of http and smtp to build an Internet protocol for money — a digital payments system that can support and partner with existing banks, money transfer companies, and merchants to make sending money as easy as sending an email,” says Larsen.